Tuesday, January 20, 2009

Harris & Harris as an Obama Stock

In a post on November 5th ("The Election"), we mentioned the publicly-traded venture capital company Harris & Harris (Nasdaq: TINY), noting that a significant percentage (currently about 42%) of its portfolio was invested it what it calls "clean tech" companies. Yesterday, Harris & Harris was listed as one of seven guru buys by Forbes ("Obamasize Your Portfolio"):

Another priority for Obama is cleantech technology. Obama has spoken often about the importance of alternative energy, and it's likely his federal stimulus program will include steps to improve energy efficiency.

In a recent speech, he spoke about climate change, the need for energy independence and the importance of creating new jobs. Obama called for the U.S. to double the production of alternative energy in three years.

His message is getting through. Start-ups in solar power, biofuels and energy conservation among other areas are getting increased financing from venture capitalists at a time when other small companies are cutting back and being turned away by investors.

Many of the technologies in TINY's portfolio of high tech private start-ups are developing technologies for cleantech markets. Wolfe says he wouldn't be surprised to see big federal infrastructure projects get underway to slash unemployment and restart the economy. Some of the cash generated could trickle into TINY's portfolio companies, giving big revenue growth to these small startups.

25 comments:

Waniel Dahlmighty
said...

Just another money losing, no yield stock.

The only thing that has kept them alive is their contant selling of new shares to the public. Shares outstanding grew from 8.86 million in 2001 to about 26 million in 2008. In today's stock market they amy not be able to continue raising money easily. (TINY shares now trade well below book value) making any secondary offering dilutive to BV.

TINY has posted net losses in 8 of the past 9 years and is expected to lose money again in 2009.

Why would anybody want this POS when so many proven and profitable companies are available at great valuations right now?

Instead of making fun of me for my horrible picks, why don't you take a look at your own portfolio which lacks excitement? MO might not give you a big haircut, but your portfolio sure misses the tingling feeling of down almost 100% like mine is.

I own some TINY but the best way to play emerging technology is a picks and shovels business like FEIC, IMO. (Or if you want a smaller cap, CVV) I haven't bought any FEIC yet because I think it might have a big drop soon (short interest has been building) like VECO did. As I've gotten more cynical I've also gotten more skeptical about publicly traded venture capital companies. So I'm not sure if I'm ever going to add to my small TINY holdings.

The advantage of a publicly-traded venture capital company is the advantage of venture capital generally: you have basket of potential home run companies, and you only need one or two to succeed for the investment to payoff. That said, TINY will probably be close to dead money until the IPO market thaws, but when that happens, it ought to have a few portfolio companies ready to go public.

I've made a mistake with this holding by simply holding it. I've missed two chances so far at 10-bagger returns. My average cost on this is about $3 per share, but Harris & Harris spiked to about $30 per share in 2000 when one of its portfolio companies (a software company) went public. Then again, in 2002, the company was trading for around $2 per share, if memory serves, and, in an effort to raise capital in tight capital markets, offered existing shareholders the right to buy into a secondary offering at book value. Had I done so, and sold at the next peak, that would have been another 10x move. Next time, I'll take some profits.

Daniel Wahl e-mailed me a month or two ago informing me that he would no longer be reading this blog, because of the "attacks", as he described them, by you (this is, he told me, the same reason he no longer comments on GuruFocus). Just thought I'd mention that in case you're wondering why he hasn't been taking the bait here recently.

It doesn't really matter Daniel no longer posts on Gurufocus because I post there every day. What I offer to people is 30 years of un-adulterated market experiences (rare instances of adultery also -case in point SLM). I guess 90% of GF readers look forward to my posts. Many email me every day asking for investing opinions and I rarely disappoint them- I give out picks like candies on a kid store.

It is unfortunate that Daniel has decided not to read your forums! I certainly welcome him back to Gurufocus so that I can teach him some tricks of the game. He has a lot to learn , especially on risk management.

By predictable investments, I meant those that have solid earnings and profit history. Most of them are followed by a lot of Wall street analysts and you get to compare their estimates before trying to make an investment decision.

Money losing issues like TINY, DSNY and Hemisphere should be for gamblers. Go for solid blue chips like I have always done.

It's not a private equity company, it's a venture capital company. Venture capital isn't about grinding out steady earnings every quarter. It's about speculatively investing small amounts of money in a few dozen start-up companies, with the goal of maybe one in ten leading to an extremely profitable exit (e.g., via an IPO where the VC's stake sells for 10x or 100x of its original investment in the company). Harris & Harris's management has a solid track record of finding and investing in those types of home-run companies in the past.

The reason I continue to own their stock (and may consider adding more at these levels or lower) is because I think TINY's management has a good chance of achieving similar home runs in the future.

They have cash of less than a million dollars on their balance sheet. Also their BS shows an additional paid-in capital of 179.62 Million $ which means they are heavily in debt. I must be missing something here.

"Venture capital isn't about grinding out steady earnings every quarter...with the goal of maybe one in ten leading to an extremely profitable exit ... I think TINY's management has a good chance of achieving similar home runs in the future. "

How do shareholders profit from ownership in home runs that come once in a while? Do they spin out shares or pay a dividend when they hit a home run?

"They have cash of less than a million dollars on their balance sheet. Also their BS shows an additional paid-in capital of 179.62 Million $ which means they are heavily in debt. I must be missing something here."

Perhaps you are. Those numbers aren't consistent with the info from the company's 3Q Report, which also addressed your earlier point about the company's tack of raising additional equity. From that report:

"In June of this year, just before the end of the second quarter, we raised additional equity capital by placing 2,545,000 of our common shares at $6.15 per share, for net proceeds after all offering expenses of $14,383,497. Upon the announcement of this registered direct offering to financial institutions, we received a fair amount of criticism from shareholders, even from some of our long-standing shareholders. Some expressed their opinion that we should not have raised additional capital at all, given our debt-free status and our relatively large holdings of U.S. treasury securities prior to the offering. Others objected to our timing, wondering why we did not wait for the stock market to improve, as June of this year was the worst June in the U.S. stock market since 1930. Although we had no idea at the time that June's market tremors were just a prelude and that the world financial system would collapse in the third quarter, we raised that additional capital at the end of the second quarter because we have always believed in maintaining a balance sheet with a margin of safety.

As we noted in this year's second quarter letter to shareholders, "In all environments, we endeavor to manage the high risk inherent in our individual investments in three ways: financial diversification, economic diversification, and degree of liquidity on our parent-company balance sheet." Raising additional capital before we had immediate need for it was thus consistent with our risk-management strategy. As a result, at the end of the third quarter ended September 30, 2008, we remained debt free and had $57,970,695 in cash and U.S. treasury securities, which was equal to 47 percent of our total assets of $123,076,500."

I don't remember if the company spins out shares or pays a special dividend with the proceeds of a successful IPO. I've got a call in to the company and I'll ask them for you and post the answer in this thread. If they retain the proceeds of a successful IPO, these proceeds would of course be reflected on the company's balance sheet and in its shares NAV, and this would tend to drive up the value of the shares.

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